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Thursday, July 19, 2007

S&P Downgrades 419 Second Lien Classes

by Tanta on 7/19/2007 11:18:00 AM

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NEW YORK (Standard & Poor's) July 19, 2007--Standard & Poor's Ratings Services today lowered its credit ratings on 418 classes of U.S. residential
mortgage-backed securities (RMBS) backed by U.S. closed-end second-lien mortgage collateral issued from the beginning of January 2005 through the end of January 2007. . . .

These rating actions resolve 229 outstanding CreditWatch actions taken since Oct. 6, 2006, involving U.S. RMBS backed by closed-end second-lien collateral. It is important to note that 127 of the classes affected by today's rating actions have been previously downgraded. In fact, prior to today, Standard & Poor's had already lowered its ratings on 197 classes of U.S. RMBS backed by closed-end second-lien collateral issued between the beginning of January 2005 and the end of December 2006. Some of the classes affected by today's rating actions have been downgraded multiple times for a total of 275 previous downgrade actions.

The affected 418 downgraded classes had an original total balance of approximately $3.8 billion, which represents 6.1% of the approximately $62 billion in U.S. RMBS backed by closed-end second-lien collateral rated by Standard & Poor's from the beginning of January 2005 through the end of January 2007. During the same period, the total balance of U.S. RMBS securities backed by all types of residential mortgage collateral issued in the non-agency market was over $2.5 trillion.

Standard & Poor's is taking these actions because it believes that losses on U.S. RMBS backed by closed-end second-lien collateral will significantly exceed historical precedent and our original assumptions. We believe that this poor performance results from a combination of factors including, but not limited to, an environment of looser underwriting standards; pressure on home
prices; speculative borrowing behavior; risk layering (the combination of several risk elements for one single borrower); very high combined loan-to-values (CLTVs); financial pressure on borrowers resulting from payment increases on first-lien mortgages; and questionable data quality. Furthermore, in the past, when borrowers had difficulty managing their mortgage payments, they were able to refinance. However, as a result of tighter underwriting standards, an increase in interest rates, and home price erosion in various regions of the country, we believe it will be more difficult to refinance, and this will result in further delinquencies and defaults.

These U.S. RMBS transactions backed by closed-end second-lien collateral have been experiencing high early payment defaults that have not abated. Originally, we believed that these losses might abate and that the transactions would revert to delinquency and default patterns that are closer to historic norms. However, these transactions have now reached a sufficient level of seasoning for us to conclude that, based on the factors above, they will evidence delinquency and default loss trends indicative of poor future performance that will continue to exceed historic precedent and our original ratings assumptions. . . .

The downgrades on the 418 different classes were spread across the various ratings categories as follows: 34.62% were from the 'BBB' rating category, 25.42% were from 'BB', 17.19% from 'A', 16.22% from 'B', 3.15% from 'AA', 2.66% from 'CCC', and 0.73% from 'AAA'. Therefore, 78.93% of the lowered ratings were from classes rated 'BBB+' or lower. (It should be noted that although there are eight 'AAA' rated classes included in this analysis, they are actually from only three transactions.) . . .